1. John R. Swinton, Ph.D. Center for Economic Education Georgia College & State University

2.  Question Take from 2013 AP Free Response Section:  The graph below illustrates the demand, marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves for a profit-maximizing monopolist.

3.  Assumptions (before getting to the question): ◦ Price setter ◦ Barriers to entry ◦ Large Number of Buyers (I will discuss Monopsony if time permits) ◦ Unique Product ◦ Complete Information ◦ Profit-maximizing Behavior

4.  Barriers to entry ◦ Patent/ Copy write ◦ Government Contract ◦ Economies of Scale ◦ Access to Unique Resource ◦ Illegal Activity

5.  (a) Assume that the profit-maximizing monopolist is unregulated. Using the labeling in the graph, identify each of the following.  i. The monopolist’s quantity of output  ii. The monopolist’s price  iii. The profit earned by the monopolist  iv. The deadweight loss

6.  Individual Firm Decision: ◦ Rule #1: Set Output such that MC=MR  MR not the same as Market Price (because the demand curve is downward sloping) ◦ There is no guarantee that a monopoly will be profitable

7.  Determine Marginal Revenue (given in graph by line MR): Price Quantity Demand 25 23 400440

8.  Determine Marginal Revenue (given in graph by line MR): Price Quantity Demand 40 400800

9.  Answer part (a):  Setting MR = MC we see that the profit maximizing level of output is Q 1

10.  Answer part (a):  The price that will clear the market (Qs=Qd) is P 3

11.  Answer part (a):  Profit will be area P 1 P 3 ac

12.  Answer part (a):  The deadweight loss will be area caf.

13.  (b) Now assume that the monopolist can perfectly price discriminate. Using the labeling of the graph, identify each of the following.  i. The quantity produced = Q 3

14.  (b) Now assume that the monopolist can perfectly price discriminate. Using the labeling of the graph, identify each of the following.  ii. The total revenue received by the monopolist

15.  (c) Instead, assume the monopolist charges a single price and is regulated to produce the socially efficient quantity. Using the labeling of the graph, identify each of the following. ◦ i. The social efficient quantity ◦ ii. The consumer surplus at the socially efficient quantity

16.  (c) Instead, assume the monopolist charges a single price and is regulated to produce the socially efficient quantity. Using the labeling of the graph, identify each of the following. ◦ i. The socially efficient quantity.

17.  (c) Instead, assume the monopolist charges a single price and is regulated to produce the socially efficient quantity. Using the labeling of the graph, identify each of the following.  ii. The consumer surplus at the socially efficient quantity = P 1 P 4 f.

18.  (d) Is the monopolist facing the regulation in part (c) earning a positive economic profit, earning zero economic profit, or incurring a loss? Explain.

19.  (e) Is point f in the elastic, inelastic, or unit elastic portion of the demand curve? Explain. elastic inelastic Unit elastic

20. Key diagrammatic difference: Price Quantity Supply Marginal Cost Derived Demand (MRP) Q1 P1